Carolina First Corp. v. Whittle

• Decision Date: 30 October 2000
• Docket Number: No. 3254.,3254.
• Citation: 343 S.C. 176,539 S.E.2d 402
• Court: South Carolina Court of Appeals
• Parties: CAROLINA FIRST CORPORATION, a S.C. Corporation, proceeding pursuant to § 33-7-400 et. seq., S.C.Code of Laws, by and through its shareholders, Emory Lester, Beatrice Hutchinson, and John Wesley Purdie, Jr, Appellants, v. Mack Ira WHITTLE, Jr., William S. Hummers, III, Stephen Powell, Edward J. Sebastian, David Baker, R. Cobb Bell, Claude N. Epps, Jr., M. Dexter Hagy, Jr., Keith C. Henson, Michael R. Hogan, James J. Johnson, David L. Morrow, Walter J. Roberts, Jr., Jasper Salmond, Charles B. Schooler, Elizabeth P. Stall, James W. Terry, William R. Timmons, Jr., Thomas C. Vandiver, Judd B. Farr, C. Claymon Grimes, Jr., Carolina First Corporation, a S.C. Corporation, John Doe and Jane Doe, Defendants, of whom Mack Ira Whittle, Jr., William S. Hummers, III, Stephen Powell, Edward J. Sebastian, R. Cobb Bell, Claude N. Epps, Jr., M. Dexter Hagy, Jr., Keith C. Henson, Michael R. Hogan, James J. Johnson, David L. Morrow, Walter J. Roberts, Jr., Jasper Salmond, Charles B. Schooler, Elizabeth P. Stall, William R. Timmons, Jr., Judd B. Farr, C. Claymon Grimes, Jr., and Carolina First Corporation, a S.C. Corporation, John Doe and Jane Doe, are Respondents.

343 S.C. 176

539 S.E.2d 402

CAROLINA FIRST CORPORATION, a S.C. Corporation, proceeding pursuant to § 33-7-400 et. seq., S.C.Code of Laws, by and through its shareholders, Emory Lester, Beatrice Hutchinson, and John Wesley Purdie, Jr, Appellants, v. Mack Ira WHITTLE, Jr., William S. Hummers, III, Stephen Powell, Edward J. Sebastian, David Baker, R. Cobb Bell, Claude N. Epps, Jr., M. Dexter Hagy, Jr., Keith C. Henson, Michael R. Hogan, James J. Johnson, David L. Morrow, Walter J. Roberts, Jr., Jasper Salmond, Charles B. Schooler, Elizabeth P. Stall, James W. Terry, William R. Timmons, Jr., Thomas C. Vandiver, Judd B. Farr, C. Claymon Grimes, Jr., Carolina First Corporation, a S.C. Corporation, John Doe and Jane Doe, Defendants, of whom Mack Ira Whittle, Jr., William S. Hummers, III, Stephen Powell, Edward J. Sebastian, R. Cobb Bell, Claude N. Epps, Jr., M. Dexter Hagy, Jr., Keith C. Henson, Michael R. Hogan, James J. Johnson, David L. Morrow, Walter J. Roberts, Jr., Jasper Salmond, Charles B. Schooler, Elizabeth P. Stall, William R. Timmons, Jr., Judd B. Farr, C. Claymon Grimes, Jr., and Carolina First Corporation, a S.C. Corporation, John Doe and Jane Doe, are Respondents.

No. 3254.

Court of Appeals of South Carolina.

Heard April 13, 2000.

Decided October 30, 2000.

Rehearing Denied January 8, 2001.

T.S. Stern, Jr., and John A. Hagins, Jr., both of Covington, Patrick, Hagins, Stern & Lewis, of Greenville, for Appellants.

David L. Freeman and Wallace K. Lightsey, both of Wyche, Burgess, Freeman & Parham; David Horton Wilkins and Timothy E. Madden, both of Wilkins & Madden, all of Greenville; and Jay B. Kasner, of Skadden, Arps, Slate, Meagher & Flom, of New York, NY, for Respondents.

HOWARD, Judge:

In this stockholder's derivative suit, we are asked to consider the demand and pleading requirements of Rule 23(b)(1), SCRCP. Three shareholders of Carolina First Corporation brought this action, primarily seeking to recover disproportionate stock bonuses paid to three high level officers. The trial court dismissed the action pursuant to Rule 12(b)(6), SCRCP, because the complaint failed to allege particularized facts to meet or excuse the demand requirements of Rule 23(b)(1), SCRCP. We affirm.

FACTUAL/PROCEDURAL BACKGROUND

Carolina First Corporation ("Carolina First") is the parent corporation of Carolina First Bank ("Bank"). Plaintiffs are shareholders ("Shareholders") of Carolina First. Shareholders brought this derivative action in accordance with S.C.Code Aim. § 33-7-400 (Supp.1999) seeking rescission of a bonus paid to defendants Mack Whittle (President/CEO of the Bank), William Hummers (Executive Vice President and Chief Financial Officer of Carolina First and the Bank), and Stephen Powell (Vice President of Operations of the Bank) (collectively "Officers"). The bonuses were in the form of stock in Affinity Technology Corporation ("Affinity").

Affinity is a corporation formed by Edward J. Sebastian to manufacture Automatic Loan Machines. According to the complaint, Sebastian was the controlling stockholder and founder of Affinity. Sebastian was also a friend and associate of Whittle. Whittle served on the board of Affinity in addition to his duties at Carolina First and the Bank. During the time in question, Shareholders allege that Sebastian also participated as an ex officio member of the Carolina First Board of Directors, although he had a conflict of interest in doing so.

Carolina First and Affinity entered into an agreement by which Carolina First loaned Affinity $290,000 and provided "start-up" assistance. In return, Carolina First received stock and warrants in Affinity, representing approximately thirty percent of Affinity's then-outstanding stock. Carolina First also became one of Affinity's customers, ordering eleven machines. According to Shareholders, Carolina First received Federal Reserve Board approval to enter into the transaction with Affinity, but Carolina First was severely restricted in its ability to sell its shares of Affinity stock on the open market.

The Carolina First Board then awarded the three named officers a bonus of approximately ten percent of the Affinity shares owned by Carolina First. According to Shareholders, no restriction attached to the shares given as a bonus to the three officers. Whittle received 433,434 shares, and Hummers and Powell each received 116,600 shares.

At that time, a "fairness" letter was written at the Board's request, which valued the shares at $.88 per share. The complaint alleges that, unbeknownst to the disinterested members of the Carolina First Board, Sebastian and Whittle had a plan in place to publicly offer Affinity stock. The complaint further alleges that Whittle, Hummers, Sebastian, and Powell knew the value of the Affinity stock would be at least $10 to $15 per share once it was traded publicly, and they falsely misled the Board of Directors by failing to disclose this information at the time the Board awarded the bonuses.

Approximately ninety days after the bonuses were awarded, Affinity successfully completed its public offering, at an initial public offering price of $13 per share. The complaint alleges that the shares were ultimately traded at a high of $24 per share. Based upon this range, they allege the Whittle bonus had a market value between $5,634,642 and $10,402,160, and the Hummers/Powell bonuses had a market value between $1,615,800 and $2,798,400. These bonuses greatly exceed the total reported earnings of Carolina First in each of the previous years and are alleged to be unreasonable under any view of business judgment.

Shareholders essentially allege that this bonus scheme was devised as a method of self-dealing at the expense of Carolina First and the Bank. In this regard, they allege that Sebastian and Whittle used the Bank's relationship with Affinity to "hype" the Affinity stock at the time of the initial offering, knowing that the values could not be sustained, and knowing that Carolina First could not profit by selling its shares because of the Federal Reserve Board restrictions.¹

Shareholders allege that Whittle, Powell, and Sebastian have a long-time personal and business relationship which they have used to facilitate their self-dealing at the expense of Carolina First and the Bank. Prior to the Affinity deal, Sebastian was the owner of two corporations which controlled Republic Bank. In 1993 and 1994, Carolina First Bank purchased various Republic Bank branches, credit card accounts and, ultimately, its assets and liabilities. They allege that these transactions were not financially sound and that Sebastian participated in them as a "de facto" member of the Carolina First Board during 1994 and 1995, before becoming an appointed member in 1996. They further allege that Whittle, Hummers, Powell, and Sebastian improperly manipulated the Bank's earnings reports to facilitate their selfdealing, using improper accounting practices. These improper accounting methods later required a "write down" of assets, which Whittle and Hummers then falsely painted to the disinterested majority of the Board in a positive light as a "restructuring." According to Shareholders, Whittle falsely and fraudulently represented to the Board that the accounting principles which required the "write down" were new, although they had always been the proper accounting principles to employ.

On February 25, 1997, Shareholders filed their Third Amended Complaint² alleging the Affinity stock bonus resulted in gross over-compensation, the Officers manipulated the corporation's earnings reports, and the Officers engaged in abusive or unfair personnel practices. Shareholders alleged that the Board refused to bring any action to recover funds to which the bank was entitled and that any further efforts to have the Board do so would be futile.

Carolina First and the other defendants³ moved to dismiss the complaint for, among other things, failure to state a cause of action under Rule 12(b)(6), SCRCP. Specifically, they asserted that the Third Amended Complaint failed to meet the pleading requirements of Rule 23(b), SCRCP. The trial court granted the motions and dismissed the action. The court ruled Shareholders failed to allege particularized facts showing (1) that they complied with the demand requirements of Rule 23(b)(1), SCRCP, and that the demand thereafter was wrongfully refused, or (2) that there were adequate grounds to excuse compliance with the demand requirement. The trial court denied Shareholders' motions to amend the complaint a fourth and fifth time⁴ and subsequently denied Shareholders' motion for reconsideration. Shareholders appeal.

LAW/ANALYSIS

I. Demand Refused

Shareholders challenge the trial court's ruling that they failed to allege particularized facts to establish a pre-suit demand upon the directors of Carolina First.

Rule 23(b)(1) of the South Carolina Rules of Civil Procedure, provides:

(b)(1) Derivative Actions by Shareholders. In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the

...